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OM in the News: It’s Raining Cars in China

February 28, 2015

china overcapacityThree years ago, China’s Chery Automobile announced plans to expand its factories to make as many as 1 million vehicles a year. But demand didn’t grow as planned. So Chery today has the capacity to make 900,000 vehicles annually—twice the number of cars it sold last year. Sales have slumped by 1/3 since their 2010 peak. “Chery is a classic case” of overcapacity, says a Shanghai-based consultant.

Domestic and foreign-based carmakers are building more factories in China than anywhere else, a construction binge that risks hurting margins, writes BusinessWeek (Feb.16-22, 2015). By 2017, there will be 140 car production plants in China, vs. 123 at the end of 2014. Factories across the mainland in 2015 will be able to build 10.8 million more vehicles than will be sold in Greater China. In North America, however, plants will churn out about 3.2 million more cars this year than the factories were intended to produce when they were built.

Overcapacity is only expected to get worse for Chinese carmakers. China will have about 11.4 million vehicles’ worth of idle capacity by 2017, more than double that of European automakers. Some carmakers already are regretting plans for Chinese plants that will open in the next few years. But that decision has been made and they cannot backtrack.

Foreign carmakers have been among the most enthusiastic factory builders in China, with Hyundai, Renault, and Fiat Chrysler among those that have announced plans or are already building in China. GM will soon sell Buicks made at a plant that opened last month, with plans to open a Cadillac factory later this year. GM has 22 factories on the mainland. Volkswagen, which is vying with Toyota and GM for the global auto sales crown, has 28 plants in China and will open 3 more within the next few years.

Classroom discussion questions:
1. What are some tactics for matching capacity to demand (see Supp.7)?

2. Why are auto makers flocking to China?

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